The Pricing Strategies of VIVA Telecom Company - Case Study Example

VIVA Telecom Company Introduction Firms become infatuated with pricing than another component in a marketing program. There are four reasons for theattention that pricing gets from marketing. The first is revenue equation where revenue is equal to price times the number of entities sold. There are two ways for a company to increase its revenue. One is increasing the volume of products sold or by increasing the price. There are few instances when a firm can increase both the variables. The second reason is that it is easiest for the marketers to change price among all marketing variables. Changes in pricing can be executed in real time unlike change in distribution or product which can take months or even years to execute. Real time price changes are now demand in globalised world across different industries like hotels, air travel and electronic commerce. But prices for same products vary in two different parts of the world because of different taxes, currencies, consumer demand and tariffs. Third reason is that considerable time and pain is involved for anticipating the pricing tactics and strategies of other firms and sales people learns to read the price sheet of competitors upside down at a buyer’s desk. Price is an important variable for the buyers also since they also spend significant amount of time in doing comparison shopping for finding the best deal. Finally, pricing receives a great deal of attention since many marketers believe that one of the easiest ways of differentiating a product is changing the price. In case a buyer finds all competing product having same benefits and features they are driven mainly by price. But pricing decisions are considered among the complex decisions while developing a marketing plan. Decisions regarding price needs a tight integrated balance among many important issues. There are many issues which presents some degree of uncertainty regarding the reactions to pricing among competitors, supply chain partners and customers. These factors are crucial for determining initial prices and modifying the pricing strategy over a period of time. These factors are also interrelated with each other and thus each of them must be considered for preparation of an entire marketing plan. For example in case of increase in product quality or in case of addition of new product features usually comes with a price hike. Pricing is also influenced by distribution, like reputation and image of the outlets where the goods are sold. Organization also uses price as a toll for promotion. For example Coupon represents a combination of promotion and price and it can result in increased sales in different product categories. In case of service sector, price changes are used to fill unused capacity which occurs during non-peak demand. This report will take a look at the pricing strategies of VIVA Telecom Company. Analysis and Discussion The importance of pricing decisions to the economy and to the individual firm Pricing strategy needs continuous monitoring since the external conditions of the market is changing. Kuwait Telecom Company VIVA needs to keep a vigil on the actions of the competitors and have to gain competitive edge through their pricing actions. The decisions of VIVA about pricing may include increasing, decreasing or holding the prices at current level. Prices act as an important variable in a marketing program. It acts as a signal to the buyer, acts as a means for improving the financial performance, an instrument of competition and a substitute for other functions like promotional pricing. Signal to the Buyer: Price acts as a direct and fast way of communicating with the buyers. When VIVA sets a price it is visible to the buyer and it forms the basis of comparison between the company and its competitors like Zain and Wataniya. Price is use for positioning the brand as high-quality products instead of engaging into a head-on competition with its competitors. For example VIVA provides high quality, competitively priced telecommunications services for maximization of customer loyalty and satisfaction. VIVA has launched many promotions and services at reasonable prices. Instrument of Competition: Price can be used to quickly attack the competitors or position the firm away from direct competition. Retailers use low-price strategy for defending itself against other established retailers and department stores. Price strategy is mainly used as means of competition by using higher, lower or equal price. Financial performance: Costs and prices determines the financial performance and in such cases pricing strategies are assessed by estimating the impact of the pricing on financial statements on firm both in the long and short run. Global competition in the telecommunication industry has forced many firms in adopting pricing approaches which generates revenues in line with forecasts. Thus both costs and revenues are taken into account while selecting pricing strategies. Marketing Program: In some cases prices substitute selling effort, sales promotion and advertising. Alternatively pricing may used for reinforcing these activities in the marketing programs. Other components in the marketing program affect the role of pricing in the marketing program. For example prices are used by Telecomm companies to act as incentive for channel members, it focuses of promotional strategy, and it also acts as signal of value (Vemon, 2000). Thus while evaluating the role of pricing; the management evaluates the importance of prices as gaining a competitive positioning. Prices can help evaluate the financial requirements, buyer’s reactions and interrelationships in the marketing program. For the company volume and price are two components of the revenue equation which affects directly the profitability of the company. Other factors: The importance of pricing strategy of a firm can be further seen from the fact that pricing strategy affects the inventory and production decisions of a company in the presence of capacity constraints. Changes in pricing can be executed in real time unlike change in distribution or product which can take months or even years to execute. Real time price changes are now demand in globalised world across different industries like hotels, air travel and electronic commerce. But prices for same products vary in two different parts of the world because of different taxes, currencies, consumer demand and tariffs. Price is an important variable for the buyers also since they also spend significant amount of time in doing comparison shopping for finding the best deal. Finally, pricing receives a great deal of attention since many marketers believe that one of the easiest ways of differentiating a product is changing the price. In case a buyer finds all competing product having same benefits and features they are driven mainly by price. Explanations of variety of pricing objectives Pricing objectives forms the basis of formulating the pricing policies, setting actual prices and formulating pricing strategy. It is important for organizations like VIVA to be consistent with the atmosphere of internal organization and be compatible with external environment. Through proper implementation of pricing strategy the company should aim at achieving the objectives of the firm. The pricing objectives of firms within an industry differ from each other on the basis of variations in their organizational goals. In the long run in case of absence of clear cut policies and pricing objectives there will be non-uniformity and inconsistency with other marketing mix variables. Thus before determining actual price of product it is important that pricing objectives of the firm is formulated. The Pricing objectives vary from firm to firm and in it are quite common for a form to have multiple pricing objectives. Pricing objectives form the basis of strategy formulation and gives direction to the entire pricing process. The setting up of objectives is the first step that is done by a company before setting prices for its products or services. The pricing objectives are set on the basis of four important elements such as strategic, market and financial objective of the company, consumer price points and price elasticity, brand or product objectives, and available resources. The very common pricing objectives that is undertaken by any company comprises of maximizing short term or long term profits, increasing volume of sales, increase in market share and the monetary sales, achieving a target point for the return on investment and also of return of sales, to maintain price leadership, focus on the growth of company, match the prices of the competitors and develop strong entry barriers for the new entrants, to survive in the competitive business environment, to avoid government investigation and intervention, enhancement of the image of the products, brand or the firm, to achieve and sustain the loyalty of sales personnel, distributors, suppliers, etc., to develop a perception amongst the customers or the potential customers that the company encompasses business practices that are fair, to create excitement and interest in the consumer’s mind regarding the products, take it as an initiative to set the prices in such a way that the products are made visible, and other forms of ethical, social, or ideological objectives (Dibb and Ferrell, 2011). These objectives highlight the different mission or goals that individual companies have so as to achieve its set target. The other pricing objective can be of stabilize market price or stabilize market. This pricing objective enables the marketing head to avoid any kind of price changes and maintain a stable price in the market space and facilitate competition on the basis of some non-price element. It is more of a cost plus pricing approach in which the firm maintains a stable pricing strategy and obtains the same margins irrespective of any changes in the costs of operations. Price forms the most vital element of the marketing mix. The other factors of the marketing mix such as promotions, place and products all encompasses certain aspect of costs. Price on the contrary is associated with returns and hence forms a supporting element of other elements. The pricing objectives as already stated can be of various forms and not only is it based on demand and supply but also on other factors. However there are four main pricing objectives that best suites most of the organizations. The different pricing objectives forms are stated in the diagram below- (Hooley, Piercy and Nicoulaud, 2012) Firstly, the survival pricing objective, in which the prices are kept flexible by the company so that the prices can be lowered whenever possible to increase the sales of its products or services. This kind of objective depends on the goals of the company. The survival based pricing strategy is adopted by a company when it focuses on long term profits and for that it is even prepared to encounter short term losses. The second kind of objective is that of profit oriented pricing objective where the main focus of the company is obtaining profits. The price factor has an indirect as well as direct impact on the profit margins of the company. The direct impact encompasses whether the cost associated with the products or services is being covered by the set price. The indirect affect denotes the amount of units sold by the company. The economies of scale are influenced by the amount of units that is old by a company and even comprises of relative benefit that is associated with selling of more units. The profit based primary objective is adopted by those organizations that want to achieve profit levels by maximizing the prices set for long term growth and profitability. The third kind of pricing objective is that of sales oriented pricing objective. This objective focuses on boosting market share or sales volume. The increase in volume is measured in respect of the own sales of the company over a period of time. The market share is measured in terms of sales of the company in respect to that of other companies in the same industry. The market share and volume are not dependent on each other which state that if there is a change in one of the factor it would not affect the other factor. The fourth objective is that of status quo pricing objective (Smith, 2011). This kind of objective is adopted by a company that focuses on tactical goal which encompasses competition on various other factors apart from price. This objective focuses more on maintaining the market share rather than increasing it and do not aim to beat the prices of the competitors but helps to initiate strategies so as to meet the competitor’s prices. This pricing strategy helps in stabilizing the demand for the products or services offered by a company. VIVA Telecom Company has a wide variety of choices for setting up its pricing objectives; however the best would be the sales oriented pricing as this would aim at increasing the market share as well as sales volumes. This objective would even help in increasing the revenue for the firms and even acquire the desirable market share. If the company holds a strong market share then it would act as a barrier for the new entrants and even gain a competitive advantage for the long run. Role of demand in price determination The supply and demand helps to determine the price as it involves the willingness of the suppliers to sell and the willingness of the consumers to purchase the products. The consumer willingness to buy product or the demand increases when the price decreases. On the other hand supply or the producer’s willingness to sell increases with an increase in price, and the intersection of these two factors constitutes the equilibrium. The demand factor is a major determinant as it enables the quantity of the products to be sold at the set price. The demand curve shown below in the diagram represents the relationship of demand with that of price – (Schnaars, 1998) The demand curve represents the different forms of demand of the consumers at different pricing levels. The curve drops from top to bottom stating that large quantity of products are purchased by people when the prices are lower. The position at which the two curves intersect determines the equilibrium price. This is a balanced position in which the supply, consumer demand and the prices are all balanced. The demand curves helps in determining prices by the organization. The curve for similar kinds of products helps in analyzing how much customers are willing to pay for the same product category. The demand curves that are steep represents that customer demand is increased only a bit with a sharp drop of price, on the contrary the demand curves that are flat indicates that when there is a slight decrease in price it would indicate a greater increase in demand. The demand determinant helps the company to identify the equilibrium prices. The elasticity curve of demand helps in analyzing the elements related to sale of products and services. This helps a company to analyze whether a rise in price affects the consumer demand or not and if it does not then it is referred to as the inelastic demand in which the demand of the market remains unaffected with the increase or decrease of price levels. On the other hand if the sales figure of the company shows a decline when the prices are increased it is referred as elastic demand and this indicates the company to develop various strategies as they would have lesser options in terms of increasing prices in relation to the upcoming production costs. The demand curve even helps to determine which of the pricing strategies is best suited for the company. For instance a particular demand curve predicted by VIVA may focus towards developing cost plus pricing strategy. The cost plus pricing strategy encompasses the cost required to manufacture the products or deliver the service along with some of the predetermined profit margins. When the demand is inelastic the best pricing strategy to be adopted by the company is psychological pricing which considers the emotions and the excitement level of the consumers and the willingness towards pay extra price for a product or service. The demand factor plays a very important role in setting prices and the selection of proper pricing strategy is very critical as it indicates revenue generation and the company’s goals, and even encompasses to what extent the operations of the organization would be profitable. Cost-oriented pricing strategies The cost oriented pricing strategy is one of the ways of setting prices that takes into account the production cost of the company and even covers the profit objectives of the company. The most common form of this pricing strategy is used by retailers a constant addition of percentage mark up is done to the amount that the retailer pays for each product. The cost oriented pricing strategies is developed by focusing on cost and then implementing that price that would be at a certain point above the threshold. This strategy has the potential in generating profit level for the company and the main aim of this strategy is to implement that price points that allows for consistent profit margins over a period of time and even helps in achieving stability. The simplest form of cost oriented pricing strategy is cost plus pricing. The company that adopts this pricing strategy sets the prices as per certain specific mark ups above the cost. Example if $20 is the cost and mark up percentage is 40% then the set price by the company would be $28. The cost oriented pricing strategy is a very practical model as it encompasses the involvement of the cost for different operations in the business to generate profits. The profit and cost estimates by the company become very simpler when the prices are set on the basis of the costs that are involved in doing business. The cost oriented pricing focuses more on offering stability but it do not emphasize on any forms of profit maximization (Lang, 2007). This strategy helps in attracting more number of customers but the competitors who possess a better quality and aggressive pricing strategy would be able to gain better profit margins. Though this pricing strategy is a very old method but it is still adopted by many companies. The fixed percentage of the total cost that is added in order to set price helps the company to analyze the various cost elements in the business operations and even reduce the cost factor wherever possible. There are mainly three forms of cost oriented pricing strategies such as mark up pricing, key stoning, and break-even pricing. The mark up pricing represents the cost of production plus a certain percentage of the profit margin. Keystoning refers to doubling of the cost or marking up prices by an amount of 100%. The break even pricing denotes stating the price in such a way that there is no loss and no profit. Amongst the three the best pricing mechanism for the selected company would be mark up pricing, as it would enable the company to cover up all the cost elements on the basis of which the prices would be set for offering the telecom services to its customers. This strategy even helps the company to maintain sustainability in the market place without much of changes in the system. VIVA Telecom Company can implement this strategy so that it covers up all the operating costs. The company is Kuwait based which offers greater scope for many new entrants. In such a competitive business environment it would be necessary for the company to constantly incorporate innovative technologies in the system to be at par with its competitors and this would comprise of some additional cost. The prices for its telecom services can be so set by the company that it covers such a cost and add a small percentage of profit margins so as to achieve sustainability for longer run. How the PLC, competition, distribution and promotion strategies, guaranteed price matching, and customer demands, the Internet, and perceptions of quality can affect price? There exist various factors that have a direct impact on the pricing strategies. Some of these factors comprise of product life cycle, promotion or distribution strategies, competition, and customer demand, guaranteed price matching, Internet and quality perceptions. Product life cycle denotes that every product passes through four different stages in which pricing plays a very important role. The four stages are described in the diagram given below – (Diamantopoulos and Mathews, 1995) The four stages comprises of introduction, growth, maturity, and decline. When the product is in the introduction phase the pricing strategies changes as the product is completely new to a market so the best form of pricing is penetration or skimming price. The penetration pricing strategy states that the prices that are set for the products or services should be as low as possible so as to capture more of market share and gain more of exposure and distribution. The penetration pricing adopted by the company should be supported by a well structured marketing strategy that comprises of various vital elements such as distribution of the products or services, promotions and mass production. The main objective of this strategy is to ensure that the prices are such set that it can penetrate well into the market. It encompasses setting low prices and focuses more on distribution into a mass market. This pricing strategy has gained importance for those companies which are entering into new markets with their products or services. The skimming pricing strategy is another form that is used in most products or services that are in the introductory phase. This indicates setting up high prices for a completely new product so as to capture the high market demand. The sales figure of a company should be well analyzed while incorporating the skimming pricing strategy as the prices should be lowered once the sales level off or else the company’s revenues would be affected by the new entrants and even would enable loss of market share. In the growth stage there is not much of price changes that is done as this stage facilitates more on having competitive prices. The maturity stage is a very critical stage in which the company focuses on expanding the product life in some cases the prices of the products are reduced and even new target markets are acquired or certain modifications are done on the existing product line so as to maximize the total sales of the firm. In the declining phase most of the companies operates with the same price but with certain changes in the form of promotional offers, etc. The distribution and promotion strategies also affects price as they form a major part of the operating cost of the company. If the company utilizes its own distribution system it would involve investment as well as if the company opts for media such as TV, radio, newspapers, etc it can constitute a major portion of the cost. If the cost is more than the prices have to be higher so as the entire cost factor is covered by the company. Quality plays a very important role in determining cost it is a common perception that a product or service whose quality level is high has to be of higher price. If the price is low then it is assumed that the quality level is also low. With the evolution of internet the prices are greatly affected as more of competitive prices have to be set by the company so as to achieve the target audience. The consumer demand greatly affects price. If the demand is low then the prices cannot be set high by the company as it would result into low returns. On the contrary when the consumer demand is high the company can opt for setting high prices or adopting competitive prices so as to maximize the profit levels as well as capture larger portion of the market share. However amongst the various factors the element that would affect the prices of VIVA would be the consumer demand and PLC. The service offered by the company is in the growth strategy in which the company should adopt measures so as to sustain in the competitive business environment for long run and even develop some more features in its service. The consumer demand for VIVA in Kuwait is moderate so the company should develop strategies to capture more of market share by offering quality service at a reasonable and competitive price. The procedure for setting the right price There are certain major factors on the basis of which prices are set by the company for its products or services. The first step is setting up of pricing goals which has three main objectives which are profit, status quo, and sales. The clearly defined objective helps the company to be ensured what kind of pricing strategy can be adopted so as to maximize the sales and profit levels of its products or services. The next step is towards estimating the overall demand of the consumers for the products or services being offered by the company (Schindler, 2011). The demand level prediction would enable the company to set appropriate prices either high or low depending which form of demand exist in the market that is elastic or inelastic. The cost of the overall business operations is also analyzed by the company so that the prices are not lower to cover up the total cost for the company. This step even comprises of estimating some profit margins for the product or services being offered and setting the prices according to analyzed profit level. The third step is of setting pricing strategy by the company which should be as par with the consumer demand and even at par with the competitors. The pricing strategy depends on the stage the product or service is in and even depends on the long term objectives of the firm. The pricing strategy should be so set by the company that it does not only meet the short term objectives of the company in terms of achieving profit levels but also should focus on gaining market share and for sustainability in long run. The pricing strategy that is adopted by the company should be well aligned with the pricing tactics of the company. Proper demand and supply analysis plays a very important role in setting prices for the products or services being offered by the company. The four steps forms the basis on which the right pricing strategy is obtained. The same procedure would be applicable for the VIVA Telecom Company. The company should have full confidence on the services it offers and should not merely copy its competitors. The long term goal of the company should be to become the market leaders and even expand its market. The pricing objective for the company should be sale oriented pricing objective which would focus on improving sales volume and market share. The demand estimation can be carried through analyzing the consumer market demand of its current market and even analyzing the profit level of the company with that of its competitors. The pricing strategy best suitable for the company would be cost plus pricing strategy. This would help the company to overcome all its cost for its business operations and simply adding a small portion of profit margins to the cost. This is also regarded as mark up pricing technique. The prices for its services using this strategy would be competitive in the market place and would even help VIVA to achieve its sales oriented pricing strategy. Conclusion Pricing forms a very important part amongst all the business strategies. This is simply because pricing aims at achieving revenues and profit margins. A company should focus on its pricing strategies so that it can acquire greater percentage of market share and even sustain for a longer term in the highly competitive business place. VIVA operates in a highly saturated industry of telecom. The entry barrier to this sector is very low and so it is very essential that the company adopts the best of pricing strategy so that it can compete with the existing players in the market as well as develops a strong brand image for the new entrants. The pricing decisions play a very important role for the economy as well as for the company. The pricing decisions are affected by various factors such as consumer demand, PLC, quality perception, etc. It is the pricing strategy that determines whether the firm would be a market leader or loss leader. The supply and demand forms the vital factor on which the prices for the products and services can be determined. The company needs to be flexible enough to change the pricing structures in relation to the market demand. The recommended pricing objective for the company is sales oriented pricing objective where the main focus of the company should be to increase market share and sales volume. To achieve this objective the best pricing strategy would be cost plus pricing which would enhance the current market position of the company as well help the company in attaining sustainability for long run. References Diamantopoulos, A., and Mathews, B. (1995). Making pricing decisions: a study of managerial practice. Canada : Chapman & Hall. Dibb, S., and Ferrell, P. O. C. (2011). Marketing Concepts & Strategies. UK: Cengage Learning Hooley, G., Piercy, N., and Nicoulaud, B. (2012). Marketing Strategy & Competitive Positioning. New Delhi: Pearson Education Limited Lang, C. (2007). Pricing strategies and price politics in the key account enterprise business. UK : GRIN Verlag. Schindler, R. M. (2011). Pricing Strategies: A Marketing Approach. USA : SAGE Publications. Schnaars, S. (1998). Marketing Strategy. USA: Simon and Schuster. Smith, T.(2011). Pricing Strategy: Setting Price Levels, Managing Price Discounts and Establishing Price Structures. USA : Cengage Learning Vemon, S. (2000). Marketing Strategy: A Global Perspective. London: Fort Worth Tex. Read More